What is the Actual Inflation Rate?

The True Value of a Dollar

Why do I get a different number everywhere I look?

For most of us, when we hear the value of a dollar, a finite and fixed about of purchase power comes to mind perhaps a can of coke. But I remember when I was a kid I could get a coke for a quarter. Are you recalling that thing that your remember much cheaper as a kid right now? We all know this truth but have you ever done the math? That is right we are talking about inflation.

Mr. Government, who we all trust dearly, tells us inflation is only 2.0%. Ahhhhh, an easy answer that Mr. Gov’na posts for us every year. That is thoughtless, so why would we ever question that? Websites like CNBC & shadow stats tell us that inflation is closer to 10% per year! wait, what? …. que the record scratch sound… time to “math this $h1+ up.” (as FIRECracker over at millennial-revolution.com would say)

Assumptions: a can of coke cost 25 cents in 1989, inflation compounds year over year. Even Mr. Government could agree to that.

Conclusion:

1) 5% is more than 2% (in case knuckle draggers like Mr. Gov are reading) 
2) 5% is more realistic for the goods that us middle class upright walking hominids tend to buy.

Observant Olivia: “Ok, it is obvious that I cannot buy a coke for 44₵ today but Mr. ReFIned, that is just a single consumer item and not representative of the economy as a whole and that is what Mr. Gov’na is calculating.”

Good point Olivia. You understand the principle of a statistically significant data set across a diverse product sample set. Perhaps you also realize that these figures are based on a single geographical location. I use a can of coke to simplify the illustration because it was a median item in a more statistically significant representation of consumer goods. Pick anything you like to buy an ice cream cone, gallon of milk or gas, etc. from your geographic location in the US. I challenge you to compound the cost of your favorite 5 buys over the last 30 years. Yup, I am making you do math again. I bet you got 5% ± 1%.…I know, I am a mathematician. 🙂

Now if only there were a statistically significant data set, over a divers set of commutable products encompassing the geographical breadth of our country, why then we could figure this out in less than a fortnight. Enter CPI (Consumer Price Index) lucky for us there is such a number tallied by the Bureau of Labor Statistics. Crap that is right we are back to trusting politically susceptible numbers again. Oh well, it gives us another data point.

The .gov inflation calculation changes about every 4-8 years. Can you guess why? I will give you a hint, it is the same reason as he lies about the unemployment rate. You got it politics. It is more about making the number look politically good than about actual math. Each administration adjust the number down using Acme-math-magic. (which is too complicated for them to disclose or explain, oh but still real math, yeah, that is right, Just trust Mr. Gov’na on that, surly no one in government would lie 😉

Observant Olivia: “So Mr. ReFIned, why doesn’t Mr. Gov’na fix the unrealistic Acme-math-magic equation?”

Well Olivia no administration wants to take the hit and have inflation jump 3% during their rain, looks too bad on the campaign party resume.

So what is the actual value of a dollar? One of the most common pegs of value is the cost of gold. It is referred to as real money, international or universal money. Each country’s economy ebbs and flows and so does the purchase power or their respective currencies. Gold is universally traded between countries. And not drastically subject to production variation (about the same portion is lost or tossed every year as is mined per year per capita) like oil which is also commonly traded between counties. Gold is subject to price fluctuation due to economic volatility or war but it eventually mean reverts (the price normalizes.)

I pulled the average YOY (year over year) price rise from the data at http://onlygold.com/Info/Historical-Gold-Prices.asp And got about 9.07% (from 1955 to 2015) Think about that. The same return as the stock market and you didn’t have to pay tax on the gains! While I contemplate shifting my portfolio to gold let’s move on to the conclusion.

Inflation will cripple you if you stay in cash. The purchase power of the dollar over time drops between 2% or 5% or 9% or 10% each year depending on who you trust the most Mr. Government, consumer goods price index, gold, or CNBC & shadow stats. Chose as you wish. I choose consumer good price index pegging for inflation adjustment not only is it middle spectrum but I anticipate spending the lion’s share of my hard-earned dollars on things like housing, transition, food and consumer goods throughout my life. If you are the middle class perhaps you will too.

Got input? See a false assumption? I would love to hear your thoughts in the comments below.

Keep the FIRE burning my friends.